Why Good Guys may be a best buy 12-21-98

CBS.MarketWatch.com

SAN FRANCISCO (CBS.MW) -- Electronics retailer The Good Guys, way behind in the race for profits against larger competitors, might benefit from a brisk holiday shopping season in the Western United States.

The unprofitable Good Guys' shares (GGUY)
gguy
at 5 1/2 are a few points above their low. The shares, whose book value is close to 8, could rise if they lure the same investors piling into competitors Best Buy (BBY)
BBY, +0.87%
and Circuit City (CC)
CC, +0.22%
.

Circuit City is coming off a 7 percent positive earnings surprise last week. Best Buy, meanwhile, is expanding on the West Coast.

Good Guys, alas, for all the talk of greater profit margins as electronic gadgets made in Asia decrease in price, is still losing money. The company lost $8.9 million for the fiscal year ended Sept. 30 vs. a net loss of $12.2 million for fiscal 1997.

For the fourth quarter of fiscal 1998, the Company's net loss was $6.7 million, compared to the $6.7 million loss during the same period last year. The loss per share for the quarter was 47 cents on 14,248,000 weighted average shares outstanding, compared to a per share loss of 49 cents on 13,803,000 weighted average shares outstanding in the year-ago period.

Sales for the fourth quarter were $220.1 million vs. $204 million in the fourth quarter of fiscal 1997. Comparable store sales increased 3 percent during the quarter.

Several West Coast hedge funds and money management firms are looking at Good Guys' stock, say investment professionals. For one, they say, it's difficult finding stocks that look cheap on a relative basis to competitors. Circuit City and Best Buy shares sell for 38 and 30 times current profits, respectively.

No-frills electronics retailer Tandy Corp. (TAN) , owner of Radio Shack, sells for more than 40 times one year's profits.

Other reasons:

-- Sales of gadgets connected to the World Wide Web are a bonus for electronic retailers this holiday season.

-- Good Guys, with about 78 stores peppered west of the Mississippi, is eliminating its worst performing outlets, running cute television and radio ads and appealing to America's lust for digital satellites, digital video disks, mobile phones and other coded gimmickry. At least, that's what CEO Robert A. Gunst has said.

-- More than a year ago, CIBC Oppenheimer in a report earmarked Good Guys stock as an attractive and cheap takeover target. That was when the shares sold for about 10 1/2. Competitor Best Buy, the largest volume electronics retailer in the United States, says it will open 40 to 45 stores in its coming fiscal year, including the new markets of San Francisco and Sacramento, Calif.

Good Guys is also depending on Tower Records to add some luster to a new format of store, called Audio/Video Exposition WOW!, in California.

If Good Guys can near the sales and profits pace of a Best Buy, whose recent quarter boasted 12 percent growth in comparable store sales, the California company's stock on Nasdaq could see the same spurt that lifted it earlier this year to 15 3/4.

At a price of 5 1/2, Good Guy shares amount to a market cap of less than $80 million, or less than a tenth of one year's sales. That's what investment pros call cheap. Real cheap.

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